Ethical investing is putting money into companies and funds that fit your values, and keeping it out of the ones that do not. In Australia the same idea is also sold as responsible, sustainable, socially responsible and ESG investing, and no law fixes what any of those words must mean. The fund decides, so the label tells you less than the fund’s own documents do.
inaam is one way to do it: a registered fund picked for impact across five themes you customise, with every company named in the app. The subscription is $10 a month and the minimum to invest in the fund is $100. The fund is ASIC registered, ARSN 691 614 132.
Most people arrive here the same way. They look at their super or a share app, wonder what the money is doing, and type “ethical funds” into a search bar. What comes back is a wall of products describing themselves in similar words. The words are the hard part, so this starts with them.
what ethical investing means
ASIC’s Moneysmart defines an ethical investment as a strategy that promotes positive environmental, social or ethical issues and avoids industries and companies whose products harm health, society or the environment. It then adds the line that matters most: each fund has its own interpretation of the values it wants to protect or promote.
So there are two halves to it. One is what the fund refuses to hold, commonly tobacco, weapons, gambling and fossil fuels. The other is what it goes looking for, such as clean energy, healthcare or companies with better labour standards. A fund can do either or both, and two funds with the word ethical in their names can hold very different things.
ethical, esg, responsible, sustainable: the labels
Moneysmart treats these as overlapping names. Its page on ESG investing says ESG investing is “also known as responsible, sustainable (or sustainability-related), or ethical investing”. In everyday use each word leans a little differently:
- Ethical investing. The oldest of the terms. It leans on values, and on leaving things out.
- Socially responsible investing, or SRI. Much the same idea, and a name you will see more often in the United States.
- ESG. Environmental, social and governance: the factors a fund looks at, from carbon emissions and water use to labour standards and how the board is run. ESG describes a way of analysing companies more than a promise about what ends up in the fund.
- Responsible investing. The industry’s umbrella word. The Responsible Investment Association Australasia (RIAA) uses it for the whole field.
- Sustainable investing. Often used for funds that favour companies with stronger environmental records.
- Impact investing. The narrowest. The fund invests to reach a stated outcome, such as clean energy or affordable housing, and reports on it.
None of these words is defined in law. What a fund must do is describe its approach accurately and then follow it, which is where the regulator comes in further down.
how an ethical fund decides what to hold
Moneysmart lists the approaches a fund may use, alone or in combination:
| what the fund does | in practice | |
|---|---|---|
| negative screening | Leaves out investments that fail the fund’s criteria. | An absolute screen rejects every company with any exposure, for example to gambling. A revenue threshold lets a company in until more than a set share of its revenue, say 20%, comes from it. |
| positive screening | Looks for investments that meet the criteria. | Often done by scoring each company and weighing that score with the fund’s other tests. |
| ESG integration | Weighs ESG risks and opportunities before including an investment. | For example, the risks of climate change and the opportunities in the move to renewable energy. |
| impact investing | Invests to reach a stated goal or theme. | Affordable housing, clean energy, low carbon emissions or sustainable agriculture are the examples Moneysmart gives. |
| corporate engagement | Holds a company and pushes it to change. | As a shareholder the fund can vote at meetings and raise the issue with the board. |
The threshold detail is the one that surprises people. A fund that says it avoids tobacco may still hold a company that earns a small share of its revenue from tobacco, if the screen uses a revenue threshold. That can be a reasonable rule, as long as it is written down where you can read it.
the ethical investments you can buy
In Australia the main ways in are:
- Ethical managed funds. A fund manager pools money and picks the holdings against a stated screen. You buy units, often with a minimum investment, and pay a fee as a percentage of your balance.
- Ethical ETFs. One listed fund, bought through a broker, that follows an index built with ethical rules. You place the trades yourself.
- Ethical options in super. Your super fund may already have one. Its PDS says what the option screens and what it costs.
- Investing apps. Some offer an ethical or impact portfolio beside their standard ones, and a few are built around it.
- Shares you choose yourself. You can buy companies directly, in which case the research on each one is yours to do.
If you are comparing providers by name, the side by side sets inaam beside a micro-investing app, a growth app, an ethical fund manager and an ethical ETF, using each provider’s own published numbers.
greenwashing, and what the regulator does about it
ASIC describes greenwashingMisrepresenting how environmentally friendly, sustainable or ethical a financial product or investment strategy is. ASIC’s definition. as misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical. Its Information Sheet 271 sets out what fund issuers are expected to get right, and the general law against misleading statements applies to ethical claims the same way it applies to any other.
The regulator has taken it to court. In ASIC’s first greenwashing case, the Federal Court ordered Mercer Superannuation to pay an $11.3 million penalty after it admitted making misleading statements about some of its “Sustainable Plus” investment options. The options were marketed as excluding companies involved in carbon intensive fossil fuels, alcohol production and gambling, and the Court found members had investments in companies from those industries.
The case shows where the gap usually sits: between the sentence on the website and the list of what the fund holds.
how to check an ethical fund before you invest
These checks follow the questions ASIC puts to fund issuers, turned around so an investor can ask them. Each one can be answered from the fund’s PDS, its website or an email to the fund.
- Does the name match the holdings? Read the list of what the fund holds, in full if it is published. If a fund called sustainable holds companies you would not expect, ask why.
- What exactly is screened out? Look for the list of exclusions, whether each one is absolute or a revenue threshold, and any stated exceptions.
- What is it looking for? A fund that says it picks companies for positive reasons should explain how a company gets in.
- Is there a method for impact? A fund that claims impact should define it, name the themes or sectors it targets and explain how it measures the result.
- What does it do as a shareholder? A fund that says it engages with companies should report what it did: how it voted and what it asked for.
- Are the words specific? Green, responsible and net zero mean little until the fund says what it means by them.
- What does it cost, and is it active or passive? Moneysmart notes that some funds charge more for an ESG option than for a standard one, and that active management usually costs more than following an index.
- Can you find all of this easily? If the detail takes an hour to dig out, treat that as information about the fund.
certification
one independent check
RIAA runs a certification program for responsible investment products. A certified product has been assessed against its Responsible Investment Standard, and an external panel verifies that the issuer has procedures in place to deliver what it promises. Certification is voluntary, so a fund without the symbol can still be doing the work. Its own documents are where you check.
what it costs, and what it might earn
Ethical funds charge in the same ways other funds do: a management fee taken as a percentage of your balance, sometimes an account or platform fee, and a buy-sell spreadA small difference between the price you buy units at and the price you sell them at. It covers the fund’s cost of trading when money moves in or out. when you move money in or out. Compare the total you would pay in a year at your own balance. A low percentage on a large balance can be more dollars than a flat fee, and a flat fee on a small balance can be a large percentage.
On returns, no guide can tell you an ethical fund will earn more or less than the market. Moneysmart describes an ESG fund as one that aims to maximise financial returns while pursuing its ESG strategy. What a particular fund earns depends on what it holds, the period you look at and what it charges. Past performance is not a reliable indicator of future performance.
ethical investments in the uk and the us
The checks in this guide work anywhere. The regulators and documents it names are Australian. In the United Kingdom the usual phrase is ethical investments, and ethical funds are often held inside an ISA, a tax wrapper Australia does not have. In the United States the common names are socially responsible investing and ESG. If you are reading from either country, ask the same questions of a fund there, and expect the regulator, the tax rules and the documents to be your own.
where inaam sits
how we do it
impact, with the list published
inaam takes the impact approach from the table above. The fund picks companies against three published pillars across five themes that members customise, and every company it holds is named in the app, with the reason it is there.
Run the same checks on us. The method, on financial robustness, purposeful impact and leadership calibre, is written out on how it works. The five themes are on investment areas, and the PDS and TMD are linked at the foot of every page.
The subscription is $10 a month, which is $120 a year whatever your balance, and it is separate from the money you invest. The minimum to invest in the fund is $100. A buy-sell spread of 0.1% applies when you enter or exit the fund. Sign-up happens in the app, and SMSFs and family trusts are welcome.
what to take away
Ethical investing in Australia is a wide field with loose labels. The word on the front of a fund is where you start reading. The exclusion list, the holdings and the fees are what you are buying.
Begin with what you want your money kept out of and what you want it behind. Then read two or three funds against the checks above, ours included, and ask each fund about anything its documents leave unclear.
